Zombie debt eats lawyers’ ethics — and your money

Brian J. O'Connor
Detroit News Finance Editor

Here’s a fun banking fact: JP Morgan Chase owns the pistols used in the famous duel between Aaron Burr (founder of a firm that merged with the bank) and Alexander Hamilton. I saw the pistols in person a few years ago and, since they were antiques, I assumed they weren’t getting much use. But clearly Chase is regularly pulling those .54-cal. babies out on a regular basis to shoot itself in the foot — and its customers squarely in the wallet.

This time it involves Chase coughing up $216 million in penalties and fines to settle with Michigan, 46 other states, the Comptroller of the Currency and the Consumer Finance Protection Bureau over illegal and abusive debt-collection practices involving 528,000 credit card accounts.

The violations included trying to collect or selling to debt collectors accounts that Chase wasn’t legally allowed to collect. These debts had already been settled or paid in full, discharged in bankruptcy, was fraudulent and not owed by the debtors, was already under a payment plan, or no longer owned by Chase, according to the Protection Bureau.

But here’s the part that’s truly galling: Chase lawyers — yes, actual sworn officers of the court — filed fraudulent lawsuits and court documents, including robo-signed affidavits and failed to tell courts when it discovered errors.

Experts in debt collection, however, find my shock amusing. It turns out that because of what’s either thoughtless penny-pinching, outright greed or some combination of the two, lawyers filing legally sketchy, inaccurate or blatantly fraudulent civil lawsuits is standard operating procedure for debt collectors.

It’s aliiiiive!

“It’s a fascinating industry,” says Mike Cardoza, a San Francisco consumer protection attorney and author of “The Secret World of Debt Collection.”

It works like this: Lenders try to collect bad debt for just so long, then write it off as a loss. They sell that debt to buyers and other intermediaries, sometimes for pennies on the dollar. The debt buyers then package and parcel out the old debt to collection agencies, skip tracers and specialized debt-collection law firms that do nothing else. There’s even a name for old debts that keep coming back this way: zombie debt.

Lawyers for the debt collectors use that data to file affidavits in civil court seeking judgments, often as many as several hundred a day. The result is a virtual machine that relies on automated processes and digital records, with an emphasis on speed, not accuracy.

“There’s millions in debt being collected every year,” Cardoza says. “How much time does an attorney have to review 5,000 cases a month? They have to rely on the process and the paralegals because there’s just not that much money in it. These are not white-shoe law firms charging $500 an hour. They’re getting a 30 percent contingency of what they collect, or less.”

A less-generous assessment comes from Brian Parker, a Southfield consumer protection attorney. Debt collectors who file defective civil suits over debt do so because, “They know they’ll get judgments. They get away with it.”

When it comes to debt collection, Parker says, “There’s no money in following the law.”

That’s because the bulk of consumers who get a summons saying they’re being sued over a debt — whether it’s accurate or not — will panic and pay it, Parker says. Or they ignore the summons and later find their bank accounts or other assets being attached to pay the debt, even if they never owed it in the first place.

“The business model is to get a judgment,” Parker says. “If you attach a bag of leaves to a piece of paper and request a judgment, and no one responds, it magically becomes legitimate. Ninety-nine percent of collection agency law firms know they’ll get judgments. They get away with it.”

If consumers do call and offer to settle a debt, some lawyers will start negotiations but that can be a move aimed at stalling until the deadline for the consumer to respond to the legal summons has passed. At that point, the lawyer’s won a default judgment and has legal leverage to demand a higher settlement or payment in full.

Says Parker: “They’ll send a letter offering to negotiate and then once they get a judgment, forget about it.”

If a consumer has made a small payment on an old debt to a debt collector, that can also result in a law firm getting a judgment. Any payment “re-animates” the zombie debt beyond the statute of limitations, resetting the clock and making it a now legally enforceable debt. (In Michigan, our statute of limitations is six years.) Parker says he’s seen debt collectors go as far as entering phony payments to make it appear that the consumer has been paying on the debt.

Just say, ‘Prove it!’

If you’re contacted about a debt you don’t remember or think you don’t legally owe, there are two courses of action that need to be strictly followed. If you’re contacted by a debt collector, you have 30 days to send a certified letter, return receipt requested, and ask for proof that you owe the debt. Make sure the letter specifically says that you aren’t acknowledging you owe the debt. You must ask for proof in writing — an email or phone conversation won’t do.

If you receive a legal notice that you’re being sued over a debt, file an answer. You don’t need to be an attorney, and you can get the appropriate legal form online from your state court system, or contact your local clerk of the court for help. Michigan residents can find their appropriate form at http://courts.mi.gov/Administration/SCAO/Forms/courtforms/generalcivil/mc03.pdf.

Fill out the form right away as instructed, attach copies of canceled checks or other documents that show a debt is paid off, settled or otherwise disputed, and send it back by certified mail, return receipt requested, or file it directly at the courthouse with a time-stamp. In Michigan, you have 21 days if you were personally served, 28 days if you were served by mail or out of state. Don’t cut it close.

In the bulk of those cases, the debt may even disappear.

“Once you answer, your ability to settle for less money is stronger,” Parker says. “They don’t want to put the money into defending the case against you. It’ll probably go away, because the whole model is built on you not answering.”

Or you can turn the tables on fraudulent debt collectors and even come out ahead.

“I’m getting clients to look at their collection letters,” Cardoza says. “My clients get money and I get my attorney fees paid. There’s an upside for the consumer to get a professional to help them fight back.”

The big credit-card firms and national banks don’t want to damage their reputations by losing a suit over illegal collection activities.

“When people fight back,” Cardoza says, “everybody tries to make it go away with a confidential settlement.”

That will likely get you a lot more than anyone’s going to receive under this new $216 million settlement with Chase, which costs the bank a whopping $409 for each account where it tried to defraud its own customers. Consumers who apply will get part of a $50 million total in refunds, which averages out to a disappointing $95 for each account.

That’s why I’ve come up with my own way to settle this dishonorable matter. And so, Jamie Dimon, Chase CEO, if you’re reading this, go dig those antique firearms out of the vault, sir, because I’ve got just three words for you:

“Pistols at dawn!”

Brian O’Connor is author of the award-winning book, “The $1,000 Challenge: How One Family Slashed Its Budget Without Moving Under a Bridge or Living on Government Cheese.”


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